Achieving the ideal Customer Lifetime Value to Customer Acquisition Costs ratio

Scaling is all about timing. But the question is: How do you get it right?

Niko Laine

January 20, 2021

_

When it comes to timing, most of us tend to rely on our gut feeling for answers—it looks right, it feels right. Sounds familiar? 

You’re not alone. 

Even if your key metrics are looking healthy and it feels like the right time, it may not necessarily mean your business is ready to scale yet. Vice versa. You may feel like it’s not the right time to scale yet because you are still not hitting your Monthly Recurring Revenue (MRR) goals, but it may not mean it’s not time to invest in growth. 

The downside of scaling too early or too late is that you may very quickly find yourself burning more cash than you intended to. The question is: How do you get the timing right? 

A good indicator to rely on—your Customer Lifetime Value (LTV) to Customer Acquisition Costs (CAC) ratio.


What is an LTV:CAC ratio? 

The LTV:CAC ratio measures the relationship between the lifetime value of the customer and the costs of acquiring them. 

To determine this ratio, you will need to know the value of your LTV and CAC. Once you have them, simply divide the LTV with the CAC. For example, if your LTV is $9,000 and the total cost of acquiring a customer is $3,000, the calculation is:

$9,000 / $3,000 = 3/1

Your LTV:CAC ratio is 3:1. 

If your LTV is $3,000 and the total cost of acquiring a customer is $3,000, the calculation is:   

$3,000 / $3,000 = 1/1

Your LTV ratio is 1:1.

What’s an ideal ratio to aim for? 

Your LTV:CAC ratio measures the efficiency of your sales and marketing efforts, and tells you your readiness to scale. Before scaling customer acquisition, it’s important to get this part right. 

If your LTV to CAC ratio is:

  • Below 1:1—either you’ve just launched a company, or you’re on a sinking ship.
  • 1:1—for every new customer, you are losing the same amount of money.
  • 3:1—This is your minimum target to build a scalable and efficient growth engine. Usually, CAC is paid upfront, and the customer pays during the long lifetime.
  • Above 3:1—Fantastic. Make sure you invest heavily in customer acquisition and be ahead of the game. It’s time to burn some cash, baby!


Key takeaway: 

The ideal ratio for a growing SaaS business is 3:1. Your goal is to achieve this before investing in growth. Customer acquisition is costly, and it can take many months before you see a payback. To improve your LTV:CAC ratio and to multiply your growth rate, consider switching your monthly deals to annual deals.

Happy Calqulating! 

Author Avatar

Niko Laine

Founder, CEO and CFO

Niko is a CFO and a financial advisor who is passionate about solving problems, data analysis, mentoring smart entrepreneurs and bringing clarity and focus in difficult situations.